Just one week after gaining broadband entry into future AT&T-Comcast
Corp. territory, America Online Inc. boosted the digital-subscriber-line side of
the house by signing a five-year wholesale agreement with Covad Communications
Co.
Under the deal, the Internet-service-provider unit of AOL Time Warner Inc.
will buy wholesale DSL services across Covad's nationwide network, which reaches
more than 40 million homes and businesses in 94 of the nation's largest
markets.
In return, Covad has issued warrants to AOL requiring the ISP to buy 3.5
million shares of Covad common stock, totaling about 1.5 percent of the
company's outstanding stock pool. AOL will have the option to buy the stock at
prices ranging between $1.06 and $5 per share.
In an era of accounting scrutiny, Covad has stated that it will record the
transaction, valued at about $3.5 million, as a deferred customer incentive and
charge it against revenue during the five-year contract term.
While the deal may expand AOL's access to DSL connections, it is also a
potential boon for Covad. The competitive DSL provider emerged from Chapter 11
bankruptcy this year with a scaled-back operation, serving about 357,000
lines.
'The addition of America Online as a wholesale partner enhances our
distribution channel, enabling us to provide services to the largest
Internet-service provider in the country,' Covad CEO and president Charles
Hoffman said in a release.
'It also gives America Online the flexibility and scalability of a single,
national resource for their millions of customers who want to upgrade from
dial-up to a high-speed, always-on broadband connection,' he
added.
